If you’re going to lease a car, lease responsibly. Leasing is not my favorite choice when it comes to driving a vehicle, and a lease agreement can be confusing. The terms in this article are some of the most common.
Leasing a car means you are essentially renting a vehicle for years instead of days. A normal car lease lasts three years, and you don’t actually own the car during that time. Your monthly payments pay the leasing company for the drop in the value of the vehicle. At the end of the contract, you have the option of giving the car back or buying it for yourself.
Here are eleven common terms you should know before you start shopping around. If you want more details, there are some great articles at www.ifsautoloans.com.
1. Capitalized Cost (or Lease Price)
To calculate your monthly payments, the leasing company starts with the capitalized cost or lease price. It is the current value of the vehicle plus any fees.
2. Residual Value
The residual value is the price of the car at the end of the contract. Your monthly payments are paying for the difference between the price today (capitalized cost) and at the end of your lease (residual value). Essentially, you’re paying the leasing company for the depreciation of the car.
3. Capitalized Cost Reduction
If you make a down payment, this will reduce the capitalized cost (the beginning price of the car). It can help lower your monthly payments, but you should avoid making a down payment on a leased vehicle. If the car is stolen or totaled in an accident, the leasing company gets the insurance money. The down payment goes away, and the better choice is to have a higher monthly payment.
4. Money Factor (or Lease Factor)
Your monthly payments are also affected by your money factor, and it works like the interest rate on a loan. The higher your credit score, the lower your money factor will be. The money factor will most likely appear as a long decimal number. If you multiply it by 2,400, it will resemble an annual interest rate.
5. Market Value
The market value of your vehicle is how much you could sell it at any given moment. At the end of the lease, if the market value of the car is higher than the residual value, buying the car could be a great deal. If the market value is lower than the residual value, the leasing company gets a better deal.
6. GAP Insurance
When leasing a car, you have signed a contract to pay the leasing company a certain amount of money over time. If the leased vehicle is stolen or totaled in an accident, the insurance company will pay the leasing company. If the insurance company pays out less than what you owe the leasing company, there is a gap that you need to pay. Make sure your contract includes Guaranteed Asset Protection (GAP) Insurance to avoid that problem.
7. Purchase Option Fee
If you want to buy the car after the lease expires, the leasing company may charge you a fee. The purchase option fee exists to help protect the leasing company from losing money at the end of the lease. If you don’t buy the car, you shouldn’t have to pay the purchase option fee.
8. Disposition Fee
If you decide to return the car to the leasing company, they will likely charge you a disposition fee. It takes time and money to lease the car again or sell it to someone else. The disposition fee is meant to help the leasing company cover those costs. So whether you buy the car or give it back, there’s usually a fee.
9. Excess Mileage Fee
When leasing a car, you agree to drive under a certain amount of miles per year. If you drive over the mileage limit, the car is worth less than the leasing company estimated. To cover the drop in value, you will most likely be charged an excess mileage fee, and they charge by the mile.
10. Wear and Tear Fee
Like the excess mileage fee, the wear and tear fee helps cover any damage you may have done to the vehicle. Major dings, dents, or scratches could be included in this fee.
11. Early Termination Fee
If you decide not to finish the full leasing contract, you could be charged an early termination fee. The amount of the fee and when it can be charged depends on the leasing company. You will need to check your contract for the specific details.